Rainsoft Company
Selected data from the financial statements are provided below:
2015 2014 2013
Cash $ 44,000 $ 28,000 $ 14,000
Accounts Receivable 84,000 32,000 114,400
Inventory 44,000 166,000 100,000
Prepaid Expenses 46,000 36,000 41,600
Total Current Assets $218,000 $262,000 $270,000
Total Current Liabilities $130,000 $144,000
Net Credit Sales 442,000 652,000
Cost of Goods Sold 336,000 598,000
Net Cash Flows from Operating Activities 32,000 58,000
Refer to Rainsoft Company. What is the current ratio for 2015?
a. 0.60
b. 0.99
c. 1.34
d. 1.68
A Day Spa accepted a check from a customer as payment for services. Unfortunately,
the customer’s check bounced. The journal entry required on the company’s books as a
result of this bank reconciliation item will
a. decrease total assets.
b. decrease stockholders’ equity.
c. Both a and b.
d. have no net impact on total assets.
Which one of the approaches for the allowance procedure emphasizes the net realizable
value of accounts receivable on the balance sheet?
a. The aging of accounts receivable method
b. The percentage of net credit sales method
c. The percentage of accounts written off method
d. The direct write-off method
Which inventory cost flow method assigns the cost of the most recent items purchased
to ending inventory?
a. specific identification
b. weighted average cost
c. FIFO
d. LIFO
A company’s employees earn $5,000 per day, work 5 days per week (Monday through
Friday), and get paid each Friday. If the previous payday was January 26 and the
accounting period ends on January 31, what is the ending balance in the wages payable
account?
a. $ 9,000
b. $10,000
c. $15,000
d. $25,000
Which of the following items would be added to the company’s cash balance on a bank
reconciliation?
a. outstanding checks
b. deposits in transit
c. bank service charges
d. interest earned on the bank account
On January 1, 2013, a company sold a piece of equipment for $30,000 which it had
used for several years. The equipment had cost $45,000, and its accumulated
depreciation amounted to $20,000 at the time of the sale. What are the net effects on the
accounting equation of selling the equipment?
a. Assets and Shareholders’ Equity increase $30,000
b. Assets decrease and Shareholders’ Equity increases $5,000.
c. Assets and Shareholders’ Equity increase $5,000.
d. Assets and Shareholders’ Equity decrease $5,000.
Bihary Company has a beginning balance in its inventory account of $2,250 and the
ending balance is $1,500. Cost of goods sold is $9,750. According to the cost of goods
sold model, what was the amount of inventory purchased during the year?
a. $ 750
b. $ 9,000
c. $10,500
d. $11,250
The first cash flow in the future value of an annuity occurs when?
a. At the start of the first period.
b. At the maturity date of the loan.
c. When interest is collected.
d. At the end of the first period.
Furniture Barn and Furniture World purchased identical equipment having an estimated
useful life of 5 years. Furniture Barn uses the straight-line depreciation method whereas
Furniture World uses the double-declining-balance method of depreciation. Assuming
the two entities are similar in all other respects, which of the following statements is
correct concerning the equipment? Hint: Without worrying about amounts, graph
depreciation expense over the 5 years.
a. Furniture Barn’s depreciation expense will be greater in the second year.
b. Furniture World’s equipment book value will be greater at the end of year one.
c. Furniture Barn’s net income will be greater in year nine.
d. Furniture World’s equipment book value will be less at the end of year two.
The working capital of a company is equal to
a. current assets less current liabilities.
b. total assets less current assets.
c. long-term assets less current assets.
d. stockholders’ equity.
Refer to Rio Imports. Return on equity for 2015 is
a. 18.75%.
b. 21.43%.
c. 23.85%.
d. 27.26%.
Each of the following is included in the MD&A section of a public company’s Form
10-K except
a. Material trends, events, or known uncertainties.
b. Statements about what management expects to occur in the future.
c. Management’s views of the financial condition and performance of the company.
d. Names and experience of the company’s managers, directors, and officers.
A banker is analyzing a company which operates in the automotive industry. Which of
the following will likely be the banker’s most important consideration in determining
whether the company should receive a loan?
a. The automotive industry suffers from political pressures concerning environmental
regulation of products.
b. Inflation has been consistently high for several years.
c. The company has state-of-the-art automated equipment which enhances the
efficiency of its operating process.
d. The company has a large amount of interest payments related to other outstanding
loans.
Capitalizing an expenditure rather than recording it as a revenue expenditure
a. impacts the total book value of plant assets reported on the balance sheet and the
amount of net income reported during a period.
b. impacts the total book value of plant assets on the balance sheet, but has no effect on
the amount of net income reported during an accounting period.
c. impacts the amount of net income reported during an accounting period, but has no
effect on the total book value of plant assets on the balance sheet.
d. has no impact on the book value of plant assets on the balance sheet or the amount of
income reported on the income statement.
Refer to Dance Town Academy. How will the bank services charges be handled on a
bank reconciliation?
a. add to the balance from the company records
b. subtract from the balance from the company records
c. add to the bank statement balance
d. subtract from the bank statement balance
Which one of the following adjustments increases net income for the period?
a. Recognition of the amount of supplies used.
b. Recognition revenue earned, but not recorded.
c. Recognition of wages earned, but not paid to employees.
d. Recognition of rent costs that had been paid to the landlord in advance.
The worksheet facilitates preparation of all of the following financial statements except:
a. Cash Flow Statement c. Retained Earnings Statement
b. Balance Sheet d. Income Statement
Refer to Kalahari Limited. The semiannual cash payment on the bonds is
a. $50,000.
b. $40,000.
c. $42,400.
d. $46,000.
Accent Flooring
The company received a promissory note from a customer on March 1, 2013. The
principal amount of the note is $20,000; the terms are 3 months and 9% annual interest.
Refer to the information for Accent Flooring. What is the total amount of interest the
company will receive when the note is collected?
a. $ 300
b. $ 150
c. $ 450
d. $1,800
A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual
face rate of interest on January 2, 2013. The issue price of the bond issue was
$19,866,397 which reflected an 8.1% effective interest rate. Interest payments are made
annually.
Required:
A) Give the journal entry to record the issuance of the bonds.
B) Give the journal entry to record the recognition of interest expense at December 31,
2013. Any premium or discount should be amortized using the effective interest rate
method.
C) Give the journal entry to record the interest paid to the bondholders on January 2,
2014.
D) Give the journal entry to record the recognition of interest expense at December 31,
2014. Any premium or discount should be amortized using the effective interest rate
method.
On January 1, 2013, Kitchen Concepts, Inc. issued five-year, $10,000,000, 9 percent
notes at 98 ($9,800,000). The discount at the time of issuance was $200,000. Interest is
paid semiannually on June 30, and December 31.
Required:
A) Provide the journal entry to record the issuance of the bonds on January 1, 2013.
B) What journal entry would have to be recorded each June 30 and December 31
assuming the use of straight line amortization?
C) Give the journal entry to record the repayment of the loan principal on December 31,
2017.
Cash flows from borrowing and paying off a 90-day bank loan are classified as
a. operating activities.
b. investing activities.
c. financing activities.
d. purchasing activities.
Dreammaker Kitchens
The following information relates to the company’s November bank reconciliation:
Bank statement balance $10,700
Unadjusted cash balance from the company’s records ?
Deposit in transit 2,100
Outstanding checks 1,200
Bank service charges 300
Interest earned on the bank account 100
Customer’s NSF check returned by the bank 400
Refer to Dreammaker Kitchens. What is the company’s adjusted cash balance on
November 30th?
a. $12,200
b. $11,600
c. $10,700
d. $10,100
If a financial analyst wants to measure the relationship between profitability and the
investment made by stockholders, the analyst should use the
a. return on equity ratio.
b. earnings per share.
c. net profit margin percentage.
d. operating margin percentage.
Refer to the information provided for Aaron Corporation. Calculate net income.
a. $144,500
b. $70,500
c. $65,500
d. $58,000
With the Effective Interest Method of Amortization, the amortization of a bond
premium results in a(n)
a. increase in liabilities.
b. decrease of stockholders’ equity.
c. increase in interest expense.
d. decrease in interest expense.
Refer to the information provided for Stallworth Corp. If the company uses the FIFO
inventory costing method, the amount assigned to the November 30th inventory would
be
a. $1,505.00.
b. $1,517.50.
c. $2,109.00.
d. $2,121.50.
When determining the future value of an annuity, cash flows are presumed to occur
a. at the start of the first period.
b. at the end of the first period.
c. when the interest is received.
d. at the maturity date.
Which one of the following would neverbe considered a cash equivalent?
a. U.S. Treasury bills
b. corporate commercial paper
c. money market funds
d. common stock issued by a corporation
Use the following selected financial information to answer the questions that follow.
2015 2014
2013
Inventory $ 56,000 $ 64,000 $ 53,000
Total Assets 1,205,000 952,000 945,000
Cost of Goods Sold 360,000 420,000 440,000
Net Income 65,000 25,000 16,000
A) Calculate this company’s inventory turnover ratio for 2015 and 2014.
B) Determine the number of days it would take to turn over the entire inventory at
December 31, 2015 and 2014.
C) What problems are apparent with the company’s inventory management?
Which of the following statements is true with regard to equity capital?
a. The number of shares actually in the hands of stockholders are called outstanding
shares.
b. It is unusual for corporations to have more than one class of stock outstanding at any
point in time.
c. Preferred stock represents the shares of stock that have been permanently retired.
d. Outstanding shares represent the maximum number of shares that can be issued by a
corporation.
A company purchased land and incurred the following costs:
Purchase Price $500,000
Excavation Costs 50,000
Razing Old Building 12,500
Broker Fees 10,000
Cost of a Parking Lot 25,000
What is the cost of the land?
a. $550,000
b. $597,500
c. $572,500
d. $562,500
Mercury Corporation reported the following information on its financial statements:
2014 2013
Accounts receivable $150,000 $120,000
Prepaid expenses 9,000 10,000
Accounts payable 65,000 80,000
Salaries payable 12,000 5,000
Net income 200,000
Depreciation expense 14,000
Gain on sale of equipment 6,000
If the company uses the indirect method to prepare the operating activities section of
the statement of cash flows, what amount will be reported as net cash inflow from
operating activities for 2014?
a. $171,000
b. $215,000
c. $245,000
d. $183,000
As part of a sound system of internal controls, all disbursements (with the exception of
petty cash) should be made by check.
When making lending decisions, lenders generally are not interested in the company’s
operating assets.
An informal schedule called a ________________ is helpful for organizing and
preparing the information necessary to perform the end-of-period steps in the
accounting cycle.
A bond’s ____________________ is computed by taking the bond’s face value, then
either subtracting any unamortized discount or adding any unamortized premium.
For each of the following transactions, indicate the impact on the accounting equation
as a result of recording the related journal entry. Include an entry in each column for
each transactions, whether an increase (+), decrease (-), or no effect (NE). The first
transaction is shown as an example.
Transaction: Assets =
Liabilities + Equity
Purchase of inventory on credit + +
NE
Issued a note payable
Repaid a note and interest at maturity
Record accrual of interest expense
Record accrual of wages expense
Collect in advance for sales of gift cards
Record redemption of gift cards
Record warranty expense
Record costs incurred for warranty work
The ____________________ is the file or book that contains all of the company’s
accounts.
Refer to Maritime Marine Services. What was the cost of investments purchasedduring
2014?
The issuance of common stock increases both ____________________ and
stockholders’ equity.
An increase in a company’s revenue and expense accounts will always cause an increase
in net income for the period.
Choose the proper category of internal control activities that best matches the
following actions. Each action should be matched with a different numbered item
within the internal controls list.
a. One employee or department should verify the work of another.
b. Specific approval is given by management for the performance of activities.
c. Accounting and cash collections should be properly separated.
d. Blank checks should be stored in a locked location.
e. Initial entry into the accounting system should be from a consistent source with
complete information.
7/ Clearly defined authority and responsibility
8/ Segregation of duties
9/ Adequate documents and records
10/ Safeguards over assets and records
11/ Checks on recorded amounts
The amount to which an account will grow when interest is compounded is the
______________ value.
Hatcher Tool Service
The following transactions occurred during June 2013:
June 1 Purchased a service truck for $25,500, paying $5,500 now and issuing a note
payable for the balance; the note is due in monthly installments of $500 plus 10%
interest on the unpaid principal balance.
June 8 Performed services of $30,400. Received $6,400 cash from customers and
$24,000 for customers billed for completed services.
June 22 Issued common stock in exchange for land having a fair value of $70,000.
June 30 Received an invoice for $2,400 from the company’s advertising agency for
radio and television ads which were run during the month; the invoice is due in 30 days.
Refer to Hatcher Tool Service. Indicate the economic effects of each transaction above
on the accounting equation. Use the following format for your answers. Show the dollar
amounts in the appropriate columns and use a plus (+) sign to indicate an increase and a
minus (-) sign to indicate a decrease.
Transaction Stockholders’
Date Assets = Liabilities + Equity
The following set of items describes activities completed by a company in purchasing
and paying for merchandise and in collecting cash for merchandise sales. For each
activity, identify whether or not the activity adheres to or violates sound internal
control procedures. (Choices may be used more than once.)
a. Adheres to sound internal controls
b. Violates sound internal controls
c. Neither strengthens nor violates internal control
12/ Although department supervisors can request a preferred supplier or vendor, the
purchasing department has the responsibility for making the final decisions on a vendor.
13/ The receiving department compares the quantity of merchandise received with the
quantity ordered.
14/ Mathematical extensions and footings on purchase invoices are verified before the
invoices are paid.
15/ All supporting documents attached to an invoice are canceled when the check is
signed.
16/ The clerk in the accounting department records both purchases and payments of
invoices.
17/ Checks are signed by the clerk in the accounting department.
18/ A mailroom employee opens the mail, counts the money received, and updates the
accounting records for the amount received.
19/ An accounting department employee records cash receipts from customers and
prepares the bank deposit slips.
20/ Cash register tapes are recorded daily by an employee from the accounting
department.
21/ An employee from the accounting department compares the cash register tapes
with the bank deposits.
22/ Monthly statements are mailed to customers to indicate the current balance due.
Determining the cash flows from operating activities generally requires analyzing each
item on the income statement as well as the current asset (except cash) and current
liability accounts.
The current ratio is useful in determining a company’s ability to pay obligations when
they become due.
A loss in inventory value caused by application of the lower of cost or market (LCM)
rule is recorded in a “Loss from Impairment” account.
An overstatement error in the inventory account in the current period will result in an
understatement of ____________________ in the subsequent period.
According to the revenue recognition principle, revenues are recognized when they are
____________________ and ____________________.